Sleeping in Caves.
Last week's newsletter received a huge amount of feedback (The Folly of Bovine Behavior). The piece focused on the shortfalls, failures and inadequacies of the retail brokerage firms. You had much to say. Mostly in concurrence.
Coincidentally, in the three days following the newsletter, two supporting pieces were published, both underscoring many of the points we made in regards to the institutional deficiencies on Wall Street.
The first was former Goldman Sachs executive director Greg Smith's scathing resignation letter cum op-ed piece in The New York Times.
In it, Smith expressed his reasons for resigning amidst a "decline in the firm's moral fiber." Smith underscored the idea I touched upon last week. That is, the increasing propensity of the large firms to place their interests above those of their clients.
Following the letter's publication, the ramifications rippled across the financial landscape as media institutions called into question the integrity and acumen of all of the tax-payer bailed out firms. Their systemic callousness towards Main Street. Their continuing compensatory generosity, even as the tax payers who bailed them out continue to struggle.
Another piece worthy of mention is Matt Taibbi's recent Rolling Stone expose entitled, Bank of America: Too Crooked to Fail.
Taibbi argues that the bank has defrauded everyone from investors and insurers to homeowners and the unemployed. He asks why the government keeps bailing it out. And he does so before you've read beyond the subtitle. Worthwhile reading, to say the least.
Friday night found me in a cave in Bedford, Indiana. I wasn't hunting third-world dictators. Nor had I been fighting with my wife. My son's Scout troop took us there.
While the details remain inconsequential, the spelunking experience piqued my curiosity on so many topics.
Why do bats have eyes? Did cavemen have port-o-lets? How can the populations of small, rural towns support so many tattoo parlors?
At 3 am I woke in my bunk and beheld the cold, jagged cave ceiling. Without sounding cliché, I could not help but think of my ancestors, those pre-financial calculator, Neolithic-era investment advisors, sleeping in less plush caves.
We have since vacated caves for more comfortable, credit-fueled existences. Yet, we've somehow retained our primordial instincts. Fight or flight. The tendency to flock to safety and comfort like moths to a light.
Our ancestors would cower at many of the natural phenomena that occurred around them, most well beyond their control.
Today, we continue to cower in fear. Mostly over the idea of a 2008 redux. Instead of doubling over when thunder crashes beyond the cave entrance, we sell everything and go to cash when Brian Williams talks about protests in Athens.
Time to leave the cave. Purge the paranoia.
While policy makers were masterful in helping to steward us into the 2008 disaster, some of them have done a decent job of stewarding us out.
We still have many issues with which to contend. But, when the market opens the buffet, you'd best grab a plate and eat. Because there's nothing worse than hunger pangs when everyone around you is stuffed.
The meltdown of 2008 occurred four years ago. While the human psyche is a fragile thing (look at Lindsey Lohan), we must put our darkest fears aside and move forward. The apocalypse is not around the next curve. In fact, when NatGeo airs a show called Doomsday Preppers, then the laws of the universe dictate that Doomsday has been pushed back for ratings purposes.
Currently, investors have much in their favor.
Individual and institutional investors remain underweight equities. As markets continue to rise, they will eventually find religion.
It's like Dancing with the Stars. You mocked the viewers. Ridiculed the very idea of it. Pronounced that you'd never tune in. Yet, at some point, you find yourself alone, in a dark room, nervously glancing over your shoulder as you watch Nancy Grace flub the Tango.
Central banks have printed upwards of five trillion dollars through QE programs. Repo operations are the rule of thumb in Asia, South America and Europe. So long as the global market place has cash sloshing about in such great quantities, then the stock market will continue to act like frat boys at a keg party--nobody leaves while the beer is free.
Further, the risk premium, as well as the risk perception, has declined. Europe's issues have quieted. U.S. economic indicators have strengthened. The S&P 500 had risen more by St. Patrick's Day than in any other year since 1991.
Your instincts may tell you not to buy stocks. Likewise, mine tell me that my tongue should never be green. Yet, I never want to be the only guy in the pub whose tongue is not green on St. Patrick's Day.
The world does not appear to be leaping into the abyss on a frayed bungee cord. And so the appetite for risk assets continues to grow. Especially when the train has already left the station, leaving so many behind.
The Investment Company Institute recently reported that equity funds continue to report outflows while bond funds continue to report inflows. So, people continue to sell stocks and buy bonds. The public has not yet bought into the recent rally. And since the public is generally wrong at market inflection points, this represents a positive contrarian indicator.
Further, even though analysts have recently turned positive on earnings revisions, they have continued to feverishly downgrade individual stocks. And analysts also tend to be wrong. Yet another contrarian indicator working on your behalf.
Eventually, the flood gates will close and the party will end. Central banks will send out the pledges to mop up the beer soaked floors. But not yet. So long as the printing presses are rockin', the bears won't come a' knockin'.
The S&P 500 sits near a four-year high after closing above 1,400 for the first time since June 2008. It has left a decimated wake of bears, short sellers and disbelievers.
Recently, Treasury yields have leapt higher as bond prices were crushed, completing their largest drop in eight months. Why? Bonds hate strong economic data as it often portends inflation concerns. And bonds hate inflation like Ben Roethlisberger does a quiet evening at home.
Rising energy prices, Iranian saber rattling and thinning corporate margins are cause for concern. But not yet enough to turn out the lights.
Throw caution to the wind? Peddle to the metal? Of course not. Capital preservation remains the primary objective. Yet, safely transporting my family to wherever we might be going is also my top priority. And if I happen to be driving on a wide-open highway in favorable weather conditions, I am going to feel inclined to drive a bit faster.
Eventually, the Neanderthals created tools to assist in the tasks of daily living. Rocks. Flint. Fire. The wheel. Life became easier. More relaxed. Suddenly, people were living to the ripe old age of 20.
You are likely to live four to five times that duration. So, you better have the tools to assist in that endeavor. Shelter. Food. Fire. Wheels. A surplus of retirement capital.
Opportunities for outsized returns on invested capital can be rare. Don't squander opportunities due to lingering fears of distant thunder.
Like the Paleolithic ancestor of my great grandfather once wrote on a cave wall, "Man with fire is lucky. Man with wherewithal to build a fire is smart. Better to be smart than lucky."